Sunpower's business is unique which, not surprisingly, befuddles many investors. So here's Sunpower 101: 

Sunpower listed in Singapore since 2005 and has a 14-year track record of unbroken profitability and cashflow generation, consistent dividend payments and clean corporate governance. It has two main business segments – green investments (GI) and manufacturing & services (M&S). 

♦ The GI segment, Sunpower's growth driver, started operations in late 2017 and saw a rapid ramp up in contributions in 2018 and 1Q 2019. The GI business supplies steam, electricity and heating to factories and residences through centralized facilities on long term exclusive concessions.

♦ M&S is the foundation business, with its order book maintained at a record RMB2.5 billion as at April 2019. It manufactures environmental protection equipment and provides EPC solutions to 1500 customers in over 15 industries, of which 70% are repeat customers and exports to over 30 countries. Long-time customers include MNCs such as BASF, the largest chemicals company in the world, BP, Shell, Total and ExxonMobil, four of the world’s oil supermajors, as well as the top three oil companies in China -- CNOOC, CNPC and Sinopec.



Excerpts from UOB Kay Hian report:


Analyst: John Cheong

1Q19: Results In Line, Robust Growth Led By Green Investment Segment
1Q19 core net profit represents 20% of our full-year estimate in a seasonally weakest quarter. 

Sunpower

Share price: 
50 c

Target: 
88 c

The 31% yoy growth in core net profit was driven by the strong performance in the GI segment which led to revenue growth of 129% yoy.

Earnings quality continued to improve on better operating cash flow.

Ramp-up of existing GI projects and strong M&S orderbook should continue to drive growth. Maintain BUY and SOTP target price of S$0.88.


RESULTS
1Q19 core net profit grew 31% yoy, results in line in a seasonally weakest quarter.
Sunpower reported 1Q19 core net profit of Rmb60.5m (+31 yoy), driven by robust growth led by the Green Investment (GI) segment.

Earnings quality continued to improve on better operating cash flow before working capital which grew 83% yoy.

The growth was underpinned by the GI revenue which rose 129% yoy while manufacturing and services (M&S) revenue increased 5.8% yoy.

Gross profit grew in tandem with revenue to Rmb171.5m (+29.4% yoy) on the back of the ramp-up of the GI segment which contributed Rmb70.3m in gross profit.

GuoHongxin cu 2.2016Guo Hong Xin, Chairman of Sunpower. NextInsight file photo M&S remained stable and continued to grow. The traditional M&S segment which supports the GI expansion remained stable as revenue crept up 5.8% yoy to Rmb524.9m.

Sunpower has managed to maintain M&S orderbook at about Rmb2.5b, similar to the level in Feb 19. To improve yield in this segment, the group aims to focus on higher quality orders.

Value creator GI segment to grow with further ramp-up of existing projects. Growth in this segment is expected to be driven by securing new projects as well as organic growth of existing factories in the industrial park served by the group’s GI plants.

Since the issuance of CB2 and acquisition of the Yongxing plant, Sunpower has seven GI projects in operation and two projects under construction.

Project construction remains on track with part of the facilities for the Xintai Zhengda project expected to be completed in 2019.

In addition, the Shantou project is scheduled to begin trial production in 2H19.

STOCK IMPACT


johncheong maybank9.14“Expect growth in 2019 from full-year contributions from GI plants and continued ramp-up of existing projects. "


-- John Cheong (photo)

Management has earmarked the GI segment as the key driver for the group as:

a) Sunpower could stand to benefit from mandatory closure of small boilers and relocation of factories into industrial parks, which allows it to secure more customers;

b) full-year contribution from electricity sales from the Changrun project (2018: 3 months); and

c) Lianshui project is expected to achieve full operations and Shantou project to start contributing to earnings in 2H19.

EARNINGS REVISION/RISK
 We maintain our EPS forecasts.  
Risks include: a) higher leverage from expansion; b) project execution risk; and c) forex.

VALUATION/RECOMMENDATION
♦ Maintain BUY and SOTP-based target price of S$0.88.

SHARE PRICE CATALYST
♦ Faster-than-expected ramp-up of GI projects.
♦ Higher-than-expected project wins for the M&S segment.
♦ More EPS-accretive acquisitions.


Full report here.


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